Trading Authorization
Building on the concept of discretionary authority, this section covers the formal documents that grant third parties the right to enter orders in a customer's account and the fiduciary obligations that come with certain account types.
Types of Trading Authorizations
A trading authorization (also called a power of attorney) is a written document that grants a third party the right to enter orders in a customer's account.
| Type | Authority Granted |
|---|---|
| Full (unlimited) trading authorization | The authorized party may buy, sell, and withdraw cash or securities from the account |
| Limited trading authorization | The authorized party may buy and sell securities but may not withdraw cash or securities from the account |
Think of it this way: The key difference is withdrawal rights. A limited authorization lets someone trade for you. A full authorization lets someone trade and take money out.
Discretionary authority is a form of trading authorization that specifically authorizes the agent to choose the security, amount, or action without the client's prior consent on each trade.
Third-Party Trading Authorization
A customer may grant trading authorization to a third party (e.g., a spouse, attorney, or investment adviser) by signing a written power of attorney.
Requirements:
- The broker-dealer must have a copy of the trading authorization on file
- The third party must be identified on the account records
- The broker-dealer retains the right to refuse to accept a trading authorization or to restrict the scope of activity permitted under it
Fiduciary Accounts
Certain accounts are inherently fiduciary in nature; the person directing the account has a legal duty to act in the best interest of the beneficiary:
| Account Type | Who Has Authority | Beneficiary |
|---|---|---|
| Trust account | Trustee | Trust beneficiaries |
| Estate account | Executor or administrator | Deceased's heirs/estate |
| Custodial account (Uniform Gifts to Minors Act / Uniform Transfers to Minors Act) | Custodian | Minor |
| Guardian account | Court-appointed guardian | Incapacitated person |
In all fiduciary accounts:
- The person with authority must act in the best interest of the beneficiary, not for personal gain
- Fiduciary accounts are subject to the applicable standard of care (covered in the next section)
Exam Tip: Gotchas
All fiduciary account types share the same core obligation: act in the beneficiary's best interest. The exam may test whether you can identify which accounts are fiduciary in nature. Trust, estate, custodial (UGMA/UTMA), and guardian accounts are all fiduciary.